The World as We See It

I identify the foundational forces now driving our economy to establish a
basis for the investment recommendations you'll read in this advisory in the
months to come.

The role of the U.S. as the world's dominant economic superpower is now challenged
by an out-of-control growth in debt and a deterioration in its reputation as
a financial haven. The dollar is losing its special status as the global "reserve
currency," is leading, in turn, to higher inflation, higher interest rates,
weakening financial assets (stocks and bonds) and runaway prices for commodities.

Let the data and let them speak for themselves, with some interpretation along
the way:

1. U.S. Government Deficits: From Bad to Worse

Government deficits are the root source of the creation of money... and its
eventual debasement. Simply, when the federal government spends more than it
raises in taxes, it eventually has to create more money (in complicity with
the Fed) in order to pay the bills.

Of course, it can borrow the money, but that often includes borrowing newly
created money from the Fed. The deficits remain and they accumulate and in
time. They must be resolved, either by payment or default, either overtly or
covertly through the mechanism of inflation.

While some level of government deficits may be acceptable over modest periods
of time, the U.S. deficit is now well past the point of being acceptable. The
deficit will soon grow to monster proportions as the baby boomer retirement
obligations exceed the ability to tax the declining number of workers contributing
to the Social Security and Medicare funds.

Projections of the likely deficit compared to GDP growth make it clear that
the government is faced with hard choices. The easy path of just letting the
dollar fall is the most likely.

2. The Expanding U.S. Trade Deficit

It is consumers who primarily receive the money provided by U.S. government
deficits. In this globally interconnected world, they then spend a portion
of that money on foreign goods. An unintended consequence of the ballooning
government deficits, therefore, is a large and growing trade deficit.

The foreign recipients of those dollars - whether Chinese manufacturers or
Middle Eastern oil sheiks - have, in recent years, turned around and reinvested
those dollars in U.S. Treasuries. They have done so because of the perceived
safety of those instruments, and because of the sheer volume of the dollars
they have to invest. In addition, it has been in their commercial interest
to help finance the U.S. deficit.

With the trade deficit now running at $750 billion per year, and much of that
money coming back into U.S. Treasuries, the U.S. government has grown dependent
on foreigners to sustain the continuing deficits.

That level of debt would normally cause extreme weakness in a currency - just
as it would in the value of debt owed by a deeply indebted individual. However,
the sheer magnitude of the foreign holdings provides something of a bastion
against a total collapse in the dollar.

Even so, some foreign holders are easing toward the exits... through the purchase
of an operating company or resource deposit here, or a landmark New York building
there. They might make a billion-dollar equity investment in a brand name company,
or exchange some dollars for a basket of currencies or a ton or two of gold.
It's a delicate balancing act, because if they get too aggressive, they risk
triggering a mad dash for the exits, a nightmare scenario where the value of
their trillions of dollars in holdings would be devastated almost overnight.

3. Rising Oil Prices Affect... Everything

The growing global demand for oil, coming as it is against a backdrop of limits
being hit in production growth, is a major contributor to today's big price
rises.

The clear and present danger is that we are now using several times more oil
than we are discovering. The world currently produces about 310 billion barrels of
oil per decade. That amounts to about three times the current discovery
rate of 100 billion barrels per decade.

According to the Peak Oil calculations, we have already used about half of
the energy stored over the last 100 million years. Against that, we have a
steady increase in demand emanating from population growth and economic development,
especially in Asia. This, coupled with the dearth of major new discoveries,
assures that energy markets will remain at high prices, for the foreseeable
future. The current big drop from almost $150 to $110 has happened from a slowing
economy and from some conservation at the extreme high gas pump prices, but
the long term view is that the lack of reasonable alternative to petroleum
argues for continued higher prices returning to the previous peak in the year
ahead.

As energy is a component in the manufacture of all goods and services, this
is of no small consequence. Energy has been the basis of the abundance of our
current existence and has allowed human population to grow from 1.5 billion
to 6 billion over the last century.

4. War Affects the Deficits and Hurts the Dollar

The war in the Middle East adds unwanted pressure on oil and ratchets up government
spending. Less obvious is the damage to U.S. prestige that is important in
the ability of the U.S. to attract much-needed foreign investment.

The Congressional Budget Office estimates the war will cost 3 to 4 trillion
dollars, an amount of sufficient size that it will affect the U.S. financial
system.

Regardless of the short term political ups and downs or even a new administration,
the pressures from war for big deficits and for dollar depreciation are inescapable.

Where Is the Economy Going in the Next Six Months?

Projections

1. The housing decline is not yet done, because we will need another year
to unwind foreclosures in the pipeline. The housing bubble still has another
10% to 20% to go to fully deflate.

2. Consumers in the U.S. are not able to expand credit and are increasingly
concerned about the outlook for the economy, so they will slow spending both
at home and on imports, which means we are in a recession or about to confirm
one.

3. The financial/banking system is weaker than understood. The global system
and literally trillions of dollars in derivatives has left the world's banks
teetering on the edge. Don't jump back into financials.

4. A slowing economy - recession - coupled with inflation, creates a condition
referred to as stagflation, as the simulative bailouts compete with the debt
implosion of overleveraged financial institutions and real estate, to leave
us with stagnation and still high costs.

The result of this is that the inflation rate, interest rate, food, energy
and precious metals are heading higher as the dollar is debased.

Higher rates are not good for housing and stocks.

Finally, it is important to recognize that the world remains in the throes
of a deep and serious crisis. While many analysts will express the view that
the worst is over or that, after a modest downturn, things will bounce back
just like they always have, our view is that what we will actually witness
going forward is a fairly steady erosion of paper currency purchasing power
and sluggish economic growth. The crisis will accelerate, moving faster, even,
than in previous major shifts such as that witnessed in the 1970s.

While history may find we are too pessimistic at this point in time, in our
view it is far better to prepare for a worsening crisis and hope that it does
not materialize, than to expect business as usual.

Bud Conrad is Chief Economist with Casey Research, specialists
in natural resource and precious metals investing. And now, you can have
the opportunity to sit in on a round-table discussion of the economy, the
market, and the best ways to profit from this crisis - free and online. The
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Bud Conrad holds a Bachelor of Engineering degree from Yale and an MBA from
Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem. Currently,
he serves as a local board member of the National Association of Business Economics
and teaches graduate courses in investing at Golden Gate University. Bud, a
futures investor for 25 years and a full-time investor for a decade, is also
a regular lecturer for American Association of Individual Investors. In addition,
as chief economist at Casey Research, he produces original analysis for Casey
Research, including unique charts and research on the economy and investment
markets.